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What we can learn about culture from M&As: Lesson #1

If you have ever been part of a M&A involving the merger of some or all business functions, you have likely experienced culture change. Case in point...Sprint acquired PCS, its mobile phone business unit, in the late 1990's. Within four months of close, the PCS culture showed clear evidence of significant culture change. Wherein the past PCS had been very loose and entrepreneurial, there was an observable shift towards greater discipline in decision-making and tighter controls. Twelve months later, this change, which began in Finance, was widespread and firmly embedded in the culture.

We see this pattern repeat over and over again with M&As in different industries and sectors. The primary exception occurs when there is a balance of power between the merging firms accompanied by significant cultural differences. In this situation, think Time Warner and AOL or Daimler-Benz and Chrysler, the culture clash derails the merger and damages one or both organizations. There are lessons to be learned from both scenarios.

Lesson #1 - The Importance of 'Why'?

Every organization has a unique culture that is appropriate to its context. It is initially based on the values and beliefs of founders as to the best and right way of doing things. These may change over time as the organization encounters new challenges that cause people to modify their assumptions and beliefs. Most of the time, this is an emergent and highly tacit process of evolutionary adaptation.

When organizations merge or face an imminent threat, this slow process of adaptation is challenged. Restructuring, process changes, new technology, turnover of leaders and other internal actions bring into question the accepted way of doing things. When the proposed change is in conflict with the existing belief system, it is almost always met with significant resistance, commonly known as culture clash. If the affected parties are forced to accept the change, it can have a negative effect on not just the culture but the performance of the organization. To prevent this from happening, decision-makers need to ask two questions:

Why do we do things this way?

What would happen if we changed the way we do things?

Case Study: Acquisition of US-based Security Company

A large security company recently purchased a privately-owned, 300 person US-based security product developer and manufacturer. The objective was to acquire ownership of the latter's product portfolio and, secondarily, its customer base.

The acquired company had a tight knit culture widely described as a 'family'. It had a reputation as a 'hip' place that used agile development practices and provided opportunities for people to work on very cool, leading edge tech. The workplace was casual and relaxed with flexible work practices and a fun environment. At the same time, the company was known to demand excellence with high visibility on performance and accountability. It was also very customer-centric.

The entire organization was designed around the customer - its structures, processes, systems and practices were tightly woven together. Every employee was directly connected to the customer via their role and responsibilities, as well as the design of core business processes and use of technology. When asked, they could easily explain the precise nature of this connection and its relevance in terms of broader operations.

For example, as in most organizations, the Customer Support team acted as a first point of contact for queries from customers routing questions and issues to other teams as needed. By design, the team was very stable with low turnover and many long-term employees. To ensure this happened, team members' salaries were on par with other typically higher paying roles such as product development. As a result, team members got to know and build relationships with customers leading to a sense of continuity that fostered confidence. They were also highly respected by other employees and often asked to contribute their opinions and ideas in meetings held by Sales, Manufacturing. Product Development and others. This commitment to service and support was recognized by customers who cited it as one of the main reasons they chose to do business with the company. Yet, while important, this wasn't the primary value provided by the team.

The Customer Support team collected information from customers about their wish list of functionality and features for future releases, issues or problems they were experiencing AND competitor information. This was entered into the company's customer relationship management (CRM) system and used when determining new product development (NPD) priorities, as well as sales and marketing targets.

In order to achieve immediate synergies (meaning cost recovery), the acquirer decided that the Customer Support team should be dissolved, employees terminated and the work shifted to its operations in another region. While this made sense on paper, it had a significant negative impact on the culture and broader operations. Many of the outcomes were predictable, such as the loss of customer knowledge and relationships, as well as a decline in service levels due to a lack of product knowledge in the remote center. However, the greatest damage was to the new product development funnel. When the department was disbanded and the work moved, this was lost.

This also challenged one of the principle tenets of the acquired firm's belief system and began a process of rapid, unintended and not necessarily positive culture change. The termination of Customer Support team members was interpreted by remaining employees as a sign that the 'new' company placed a higher value on short-term financial results than on employees, customer-relationships and long-term growth. This was reinforced by other changes including a realignment of reporting relationships that saw Sales, Marketing and Account Managers report into people in the acquiring firm and expand their portfolio of products. The once tight-knit family culture quickly began to unravel and along with it collaboration, transparency and trust.

Almost every merger and acquisition is expected to recover costs by eliminating redundancies, streamlining operations and aligning structures. As such, there may be valid reasons for why the acquirer took these actions. The problem is the decisions were made without knowledge of the impact they would have on the acquired firm's operations, culture and performance. In so doing, they risked damaging the value of the acquisition and their return on investment.

This could have been prevented or the damage at least mitigated if decision-makers at the acquiring firm had asked why the acquisition had a Customer Support team and what would happen if we let the people go and move the work to another location? Similarly, what would happen if we change the roles and reporting relationships of employees in Sales, Marketing and Account Management? While they may have ultimately made the same decision, there is a good chance they would have gone about it differently.